Off-Payroll IR35: What Are the Rules and How Do They Apply?

The off payroll IR35 rules, commonly known as IR35, apply to certain contractors who provide their services through an intermediary, such as a personal service company (PSC). 

What Is IR35?

IR35 is a set of UK tax rules designed to prevent contractors from avoiding employment taxes by working through an intermediary when they would be treated as an employee if they were engaged directly. These off payroll working rules look at the actual working relationship between the contractor and the client, rather than just the wording of the contract. 

The rules look at the actual working relationship between the contractor and the client, rather than just the wording of the contract. If an engagement is inside IR35, income tax and national insurance contributions may need to be deducted from payments made to the contractor.

Which Engagements Do the Off-Payroll Working Rules Apply To?

The off payroll working rules apply to public-sector engagements and to engagements with medium and large clients in the private and voluntary sectors. 

Small private-sector clients are generally exempt from the 2021 off-payroll reforms. In these cases, the contractor’s intermediary is responsible for determining whether IR35 applies and for operating PAYE where required.

From 6 April 2026, the thresholds for determining whether a company is classed as small increased. The thresholds are:

• Turnover of £15 million or less
• Balance sheet total of £7.5 million or less
• 50 employees or fewer

A company will generally be classed as small if it meets at least two of these three conditions.

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How Do Off-Payroll Working Arrangements Work? 

Basic Structure

A contractor will usually provide their services through an intermediary, often their own limited company or PSC.

The client may agree to a daily or hourly rate with the contractor or an agency. There may also be one or more agencies involved between the client and the contractor’s PSC.

Who Determines IR35 Status?

For public-sector and medium or large private-sector clients, the client is responsible for determining whether IR35 applies to the engagement.

The client must provide a written Status Determination Statement (SDS) to the contractor and any relevant agency. This should explain the decision and the reasons behind it.

For small private-sector clients, the contractor’s PSC is generally responsible for determining the IR35 status and operating PAYE if the engagement falls inside IR35.

If the Engagement Is Outside IR35

Where an engagement is outside IR35, the PSC will generally receive the agreed payment without PAYE deductions from the fee payer.

The PSC will then deal with its own tax responsibilities, including corporation tax on its profits. The contractor can extract money from the company through salary and/or dividends, subject to the normal tax rules.

If the Engagement Is Inside IR35

Where the off-payroll rules apply, the fee-payer is responsible for making the appropriate PAYE and payroll deductions. 

This will usually involve deducting:

• Income Tax through PAYE
• Employee National Insurance contributions

The fee-payer may also need to pay employer National Insurance contributions and the Apprenticeship Levy where applicable.

For small private-sector clients, the contractor’s PSC remains responsible for assessing the engagement and operating PAYE where the engagement is inside IR35.

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Risks of IR35 Tax Avoidance Schemes

HMRC has warned about schemes that promise contractors higher take-home pay by converting income into something else, such as a loan or credit.

The guidance points out that:

• These arrangements may be treated as tax avoidance if they are used to avoid paying the correct Income Tax and National Insurance.
• Workers using such schemes may later face a bill for unpaid tax and NICs, together with interest and possible penalties.
• Fees paid to scheme promoters are generally unlikely to be recoverable and may represent a significant proportion of the contractor’s gross pay.

Workers should be careful if an employer, agency or scheme promoter tells them that they must use a particular arrangement. HMRC does not approve tax avoidance schemes.

How Do I Know If IR35 Applies to Me?

IR35 status depends on the nature of your engagement and how you actually work with the client. HMRC and the courts look at the real working relationship, rather than just what is written in the contract. Some of the main factors include:

Control

This looks at how much control the client has over your work, including your working hours, where you work, how closely you are supervised and how you carry out your duties.

If the client has a high level of control over how and when you work, this could be an indication that the engagement falls inside IR35.

Substitution

A genuine right to provide a suitably qualified substitute can support an outside-IR35 position. As a contractor, you should generally be able to arrange for someone else with the right skills to carry out the work where the contract allows this.

If you are personally required to complete the work and cannot provide a substitute, this may indicate an employment relationship.

Mutuality of Obligation

This looks at whether the client is expected to provide regular work and whether you are expected to accept it.

For example, if the client is required to keep providing work and you are expected to continue accepting it, this ongoing obligation can form part of the IR35 assessment.

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Financial Risk

The level of financial risk you take on can also be relevant when determining your IR35 status.

For example, if you are responsible for correcting mistakes at your own expense, have business costs that can reduce your profit, or take on the risk of unpaid debts, this may indicate that you are operating as an independent business.

Provision of Equipment

Whether you provide your own equipment or rely on equipment supplied by the client can also be considered.

However, using equipment provided by the client does not automatically mean that your engagement falls inside IR35. The circumstances surrounding the use of that equipment will need to be considered as part of the wider assessment.

Integration

Your position within the client’s organisation can also be relevant. If you are treated in much the same way as permanent employees, this may indicate a greater level of integration.

For example, being subject to line management or appraisals, receiving employee-type benefits, taking on responsibilities normally carried out by permanent staff, or being included in the client’s team structure can all be relevant factors.

Other factors, such as the length of the engagement, whether you work exclusively for one client and the intention of both parties, may also be considered when assessing whether IR35 applies.

What Issues and Risks Do Employers Face Under IR35?

Employers can face significant compliance risks when determining whether contractors fall inside or outside IR35. Many businesses have reviewed their contractor arrangements, but some may still have limited visibility of who their contractors are, how they are engaged and whether overseas contractors or more complex arrangements create additional complications.

Where a business incorrectly determines that a worker is outside IR35 when the rules should apply, the organisation responsible for the determination or the relevant fee-payer may become liable for the tax and National Insurance that should have been deducted.

Additional liabilities, including the Apprenticeship Levy where applicable, may also arise. HMRC may also charge interest and penalties on unpaid amounts.

Good Practice for Employers Under the Off-Payroll Working Rules 

Businesses should regularly review their IR35 processes and contractor arrangements. This may include:

• Carrying out due diligence across the labour supply chain to identify engagements that could fall within the off-payroll working rules.
• Providing regular guidance and training to hiring managers and internal teams involved in engaging contractors.
• Reviewing previously issued Status Determination Statements where working arrangements have changed or relevant case law has developed.
• Keeping clear records of how IR35 status decisions were reached and ensuring that contractual terms reflect the actual working relationship.
• Reviewing overseas contractor arrangements where different engagement structures may create additional compliance considerations.
• Making sure that IR35 determinations are made with reasonable care and that Status Determination Statements are issued with clear reasons.

Workers should also understand how their engagement operates and raise questions where the actual working arrangement differs from the terms of their contract.

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FAQs About Off-Payroll Working Rules (IR35)

What are the rules for off-payroll working in the UK?

If you provide services through an intermediary (like a personal service company) and would be an employee if engaged directly, the off‑payroll (IR35) rules apply. For public‑sector and medium/large private‑sector clients, the client must determine status, issue an SDS, and the fee‑payer deducts PAYE tax and NICs if inside IR35. 

What does it mean to be off-payroll?

Being “off‑payroll” means you work via your own company or intermediary instead of being on the client’s payroll. The off‑payroll rules ensure you pay broadly the same Income Tax and National Insurance as an employee would if the engagement is effectively employment (inside IR35). 

Who is exempt from IR35?

Small private‑sector clients are exempt from the 2021 off‑payroll reforms; for those engagements, the contractor’s company decides IR35 and operates PAYE if inside. From 6 April 2026, “small” generally means meeting at least two of: turnover ≤ £15m, balance sheet ≤ £7.5m, and ≤ 50 employees. 

Is it better to be inside IR35 or outside?

For most contractors, outside IR35 is financially better because you can use a limited company, pay a mix of salary and dividends, and keep more take‑home pay. Inside IR35 means being taxed like an employee for that contract, with higher tax/NIC and fewer planning opportunities, though it may suit some preferences.